Ramsay Health Care: 1Q trading update - moving in the right direction
About the author:
- Author name:
- By Dr Derek Jellinek
- Job title:
- Senior Analyst
- Date posted:
- 14 November 2022, 8:00 AM
- Sectors Covered:
- Ramsay Health Care's (ASX:RHC) 1Q trading update highlighted improving conditions across all markets, with revenue up 6.7%, as activity levels continue to improve in line with declining COVID cases, with positive momentum continuing into Oct and Nov.
- Profitability also improved throughout 1Q, albeit is still down on pcp, despite the lack of COVID-related government revenue and cost support in France, with COVID costs declining and favourable negotiations with health funds more reflective of labour shortages and inflationary pressures.
- Management is confident of a more normalised work force into CY23, with recruitment and retention efforts strong, absenteeism down and turnover slowing.
- While FY24 is still targeted as a “normal” trading year, the gradual improvement in activity and earnings is encouraging and suggestive of improving momentum.
- We have adjusted our FY23-25 earnings, with our price target increasing to (login to view). ADD retained.
RHC provided a 1Q trading update, noting improvement across all geographies as COVID cases decline, with the company well positioned for volume growth over the medium to long term.
Revenues increased 6.7% to A$3.5bn, while underlying EBIT fell 13% to A$172m, with margins down 113 bp to 5%.
Analysis - key takeouts across the key geographies
APAC - (revenue +3.6% A$1.42bn; EBIT 0.2%, A$137m; margin -37bp, 9.6%); improved activity, fewer cancellations and absenteeism, as COVID cases declined; admissions per workday were flat on pcp (+3.2% vs 1QFY20), but the trend improved across 1Q and into Oct.
The mix remains unfavourable (ie high day admissions, +4.3% vs overnight +0.4%); COVID-related costs were elevated (A$58m vs A$55m on pcp), but are declining (Jul A$39m; Sept A$6m; Oct lower), although expected to have some level of impact going forward; impact from Queen Elizabeth II’s passing estimated cA$7m.
UK - (revenue +5%, GBP147m; EBIT -2.1%, A$4.1m; ex A$6.2m Elysium gains); improved progressively through 1Q (Jul -2%; Sept +7%) as COVID cases declined and restrictive measures relaxed; activity levels continuing to improve in Oct, but the northern hemisphere is just moving into winter.
COVID-related costs were GBP5.7m with 3,270 patient cancellations, but improved m/m (GBP1.5m and 870 in Sep, respectively); waiting lists continue to increase with management strategising with NHS on potential solutions.
EU - (revenue +7.8%, A$1.07bn; EBIT -73%, A$11m; margins +302bp, 1.1%); revenue underpinned by growth in all services in France and the Nordics (+20%; mix toward primary care and specialist clinics), with underlying revenue up 4.9%.
Activity levels in Oct continue to improve, with COVID cases at “manageable” levels”; profit was impacted by inflation, higher personnel costs, and lower government COVID funding (down EUR14m); the French government has extended the revenue guarantee until 31-Dec-22, which should provide stability to the acute hospital business.
Forecast and valuation update
FY23-25 underlying earnings are adjusted higher, 2.4%/4.0%/3.8%, respectively, reflective of improving volumes and lower COVID-related expenses.
Our blended DCF, PE, EV/EBITDA price target moves to (login to view).
While the operating environment remains unpredictable and dynamic, with COVID, doctor/patient behaviour, inflation and workforce issues all defining the earnings profile, higher activity and lower costs are suggestive of improving momentum.
- PHI vagaries; COVID impacts.
- Weaker volumes.
- Margin compression.
- Regulatory changes.
- Slower Capio integration.
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